Greetings, welcome to the FleetCor Technologies, Inc. second quarter 2018 earnings conference call. As a reminder, this conference is being recorded. I would like to turn the conference over to our host, Mr. Jim Eglseder, Head of Investor Relations for FleetCor Technologies. Thank you, sir. You may begin.
Good afternoon, everyone, thank you for joining us today. By now you should have access to our second quarter press release and supplemental presentation, which can be found on our website at www.fleetcor.com under the investor relations section. Throughout this conference call, we will be presenting non-GAAP financial information, including adjusted revenues, adjusted net income, and adjusted net income per diluted share. This information is not calculated in accordance with GAAP and may be calculated differently than other companies' non-GAAP information. Quantitative reconciliations of historical non-GAAP financial information to the most directly comparable GAAP information appears in today's press release and on our website as previously described. We are providing updated 2018 guidance on both a GAAP and non-GAAP basis, along with reconciliations. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements.
This includes forward-looking statements about our 2018 guidance, new products and fee initiatives, expectations regarding business developments and acquisitions, and statements regarding the unauthorized access to the company's systems, including assumptions with respect to the investigation of the incident to date. They are not guarantees of future performance, therefore, you should not put undue reliance upon them. These results are subject to numerous risks and uncertainties, which could cause actual results to differ materially from what we expect. Some of those risks are mentioned in today's press release on Form 8-K and on our annual report on Form 10-K filed with the Securities and Exchange Commission. These documents are available on our website and at www.sec.gov. With that out of the way, I would like to turn the call over to Ron Clarke, our Chairman and CEO. Ron?
Jim, thanks, everyone, for joining the call today. Up front here, I plan to cover two subjects. First, I'll provide my perspective on the quarter, along with some updated guidance for 2018. Second, I'll talk about the progress that we're making in positioning FleetCor for the long term. Onto the quarter. Our Q2 results were quite good. We outperformed our internal expectations in both revenue and earnings, reporting Q2 revenue of $585 million, up 15%. That's if you adjust 2017 for ASC 606. Our Q2 Cash EPS was $2.57, up 29%. 15% top line, 29% bottom line. The last three quarters of Cash EPS profit growth have been 28%, 28%, and now 29%. Not bad. The macro, not particularly helpful this quarter versus our expectations.
Although we enjoyed pretty good fuel prices in the quarter, FX worsened considerably, spreads narrowed a bit, interest rates rose, and even our effective tax rate came in a bit worse than planned. In total, these macro factors resulted in approximately $10 million of negative revenue impact and about $0.05 of negative Cash EPS impact in the quarter versus our guidance. The macro hurting our results a bit. Let me turn to organic revenue growth in the quarter, which penciled out at 9% in aggregate, and just run through that. First, fuel card organic growth improved to 5% from 1% in Q1. International fuel card growth was 8%. Inside of that, Russia grew 29%. Here in North America, our trucking fuel business grew 20%, card lock business way up. Lots of good fuel card performances.
Unfortunately, the offset remains our U.S. local and partner business, still impacted negatively by last year's GFN conversion and the weakening Chevron portfolio. Corporate payments, very good quarter, up 20%. Inside of that, the construction vertical up 30%, our core virtual card business, our direct business up 24%. The payroll card business there way up. Cambridge posted mid-teens growth, really very solid corporate payments. Toll, 20% in Q2. That was driven 5% by higher average tags or volume, along with higher prices for our higher usage customers. The trucker strike did depress transactions and spend about 5% in the quarter but had very little impact on Q2 toll revenue because of the subscription basis there. The new toll sales in the quarter, good, up 16% over last year. Lodging rocked in the quarter, driven by SMB room volume, which was up over 30%.
That was helped by our digital booking tool. The large hotel segment remained healthy, the same store there, +3, and the hotel tuck-in from last summer terrific, up over 30%. Lodging firing on all cylinders. Our gift card business, not so good, posted a 19% decline in the quarter. Fortunately, the core transaction volume and processing revenue, which are ratable, did come in on plan and flat with the prior year. All of the decline, all the softness was attributable to some big card orders that got pushed into Q3. Our view is the decline is really just a timing issue, and that SVS for the full year 2018 should be basically flat with full year 2017. In terms of trends in the quarter, quite positive. New sales, new business up 14% versus the prior year.
Inside of that, more new fuel card sales than ever before. A record level of fuel card sales. Same store customer growth positive at +2. Customer retention again above 90%. That makes 13 consecutive quarters of 90%+. We did repurchase about $300 million of FLT stock in the quarter. That brings our repurchases since 2016 to about $1 billion. Our board increased our buyback authorization in our last meeting by another $500 million. We are also really delighted to be named to the S&P 500 Index. Feels good to be recognized for a lot of hard work and consistent performance over a long period of time. Look, the story of the quarter, good revenue and profit growth, improving fuel card organic growth, and really good trends, good sales, and good retention. Let me transition over to our rest of year guidance.
Today, we're raising our full year 2018 Cash EPS guidance at the midpoint by $0.07 to $10.42. The $10.42 updated full year guidance would result in 22% profit growth for full year 2018. Important to note that this updated guidance assumes quite a bit weaker macro environment in the second half than we had thought, say, 90 days ago. We're now estimating approximately $30 million-$40 million of negative revenue impact rest of year, driven predominantly by the worsening FX, a bit more unfavorable interest rates, both of which will more than offset the favorable fuel price. Despite the weaker macro, the fundamental performance should be pretty sound though rest of the year. We expect overall organic revenue growth in the 8%-10% range in Q3 and Q4, and likely a 9% full year 2018 organic growth number.
We do expect the fuel card organic growth to accelerate to about 8% by Q4, and our non-fuel lines of business to likely moderate into the mid-teens rest of the year as they lap some second half pricing and absorb some big contract renewals. Let me shift gears and talk a bit about the positioning of FleetCor for really long-term sustainable growth. A few areas. First up is the portfolio or the sandbox in which we play. As most of you know, we started out as a pure fuel card provider, and now look more like a diversified business payments company. Initially, fuel cards, and now really a whole line of specialized business expense cards and networks. In addition to fuel, toll, parking, hotel, food, payroll, even commuter cards. A variety of spend categories.
Second, we've entered the corporate payments or general payables space with digital offerings to automate AP and even pay international AP. This creates certainly a bigger sandbox that has a larger market potential and gives the company a much, much longer runway. We're obviously doing well in the new diversified areas, the newer categories. Our three non-fuel lines of business growing over 20% year to date. We still got more portfolio work to do. We hope to extend the geographies in which we play, specifically into Continental Europe and Asia. We do continue to explore a new idea for SVS that could help accelerate the company's overall growth. Lots of progress in structuring a bigger, broader, and more diverse company. Second area of progress is in building a global sales machine. We think sales is the single most important asset company like ours.
We've built a pretty big machine. We're now selling $hundreds of millions of new business each year. To us, that demonstrates winning. We're doing it through a variety of sales channels, field reps, telesales reps, digital channels, third-party retailers, and through a host of partners. We're also spending about $200 million in sales investment this year and getting pretty good productivity, pretty good efficiency from that. We've rotated sales pretty hard to digital. In Q2, approximately 40% of all our global fuel card new sales were from the digital channel. That is up substantially. We're making new investments this year in sales enablement. Those are ways to soften the beach to make selling easier. We're also investing in a new channel sales group that will explore sales opportunities with new partners, including merchant acquirers, insurers, and even travel management companies.
Look, we've developed a pretty impressive sales asset, and we're continuing to build it out. Lastly, we're making pretty good progress on the new product front and customer experience front and have initiatives going on really in virtually every line of business. In fuel, we've talked about our Beyond Fuel programs in our local and trucking business. Those take the form of our Builder Pro construction program and in trucking, our OnRoad card. Both of those offerings are gaining traction now, and they literally double the revenue from a customer. Quite exciting. We're launching what we call an AP or accounts payable companion card that's designed to capture just the general AP spend that our fuel card clients would have. Early take rates on that companion card are good.
I mentioned before, we've implemented a new simple fuel card UI for about 100,000 of our customers here and in the U.K. In Brazil, we've launched Fuel First. That's our program to take the toll technology and repurpose it for refueling and parking, and to target non-toll users, which is a really big unserved segment for us. We're in the process of building out the fuel acceptance network. We've got 500 Shell stations, and now we're starting to build out the Petrobras accepting locations. We're working on a plan to double our parking lot acceptance, and we're even testing fast food payments. The idea is to have extended networks beyond toll and target non-toll users. A big opportunity. In hotel, the digital booking tool that we've rolled out is now responsible for a third of all of our SMB hotel rooms booked, growing every quarter.
In corporate pay, we did launch officially our ASAP fully automated payable service for small business. A complete AP outsourcing solution, every bill that the company has. All of these product initiatives expand, again, the market potential and allow us to serve unserved customer segments. Look, in closing yes, we're still a fuel card company at our core, about 45% of our consolidated revenue, but we're expanding the line of specialized business expense cards and networks, clearly Beyond Fuel. We're building a pretty big global selling machine, and we're introducing a host of new products to open up customer segments. We're also still pretty good at acquisitions, finding them, buying them, and improving them. All of these activities are aimed at building a bigger, better, stronger, and more sustainable company as we go. We think that bodes well. All right.
With that, let me turn the call back over to Eric to pick up on the quarter. Eric?
Thanks. Before I get started on the numbers, I want to remind everyone that the company has adopted the new revenue recognition standard, ASC Topic 606, via the modified retrospective method of adoption effective January the 1st, 2018. Under this method, 2017 results are not restated. In my revenue discussion to follow, as I did last quarter, I will talk about revenue in two ways. First, using the new GAAP convention, which compares 2018 using the new ASC 606 standard to 2017 using the prior standard. Then I will discuss revenue for 2018 and 2017 as if ASC 606 was never adopted, so you can compare revenues the way we have historically presented it. Now on to the quarter.
For the second quarter of 2018, on a GAAP basis under the ASC 606 standard, we reported revenue of $585 million, up 8.1%, compared to $541.2 million in the second quarter of 2017. As a reminder, merchant commissions and certain third-party processing expenses are now netted against revenue. Which resulted in a reduction in revenue of approximately $23 million in the second quarter of 2018 versus the prior standard. For the second quarter of 2018, GAAP net income increased 35% to $176.9 million or $1.91 per diluted share from $131 million or $1.39 per diluted share in the second quarter of 2017. non-GAAP financial metrics that we will be discussing are revenues excluding the impact of the new ASC 606 standard to provide comparable revenue amounts between periods and adjusted net income, which we sometimes also refer to as cash net income or Cash EPS.
A reconciliation of GAAP revenue using the new ASC 606 standard to the prior revenue convention is provided in Exhibit seven of our press release. Adjusted net income to GAAP numbers is provided in Exhibit one of our press release. Revenues in the second quarter of 2018, excluding the impact of ASC 606, were $608.3 million, up 12.4% compared to $541.2 million in the second quarter of 2017. Adjusted net income for the second quarter of 2018 increased 27.1% to $237.8 million, compared to $187 million, and adjusted net income per diluted share increased 29.2% to $2.57 compared to $1.99 in adjusted net income per diluted share in the second quarter of 2017. Second quarter results reflect the impact of a mixed macroeconomic environment compared with the second quarter of 2017. Movements in foreign exchange rates were primarily negative, particularly towards the end of the quarter.
We believe it negatively impacted revenue during the quarter by approximately $6 million. Although we cannot precisely calculate the impact of these changes, we believe positively impacted revenues by approximately $13 million. Finally, fuel spreads had about a $7 million negative impact in the quarter. In total, those changes were approximately neutral to our second quarter revenue compared with the second quarter of 2017. Relative to our prior guidance, the macro negatively impacted our revenues by approximately $10 million in the quarter, driven primarily by unfavorable movements in foreign exchange rates, mostly in Brazil during the latter part of the second quarter. We delivered another quarter of solid organic growth, up 9% overall. Most of our major product categories performed well during the quarter.
Our fuel card business rebounded to 5% growth and would have been approximately 8%, if not for the negative impact of the conversion issue for a portion of the Mastercard portfolio in 2017 and Chevron in the quarter. As expected, we started lapping the conversion issue at the end of the second quarter of 2018 and are well on our way to the normal range of upper single-digit growth by the end of the year. The corporate payments category continues to perform well and was up 21% organically during the quarter. The growth in corporate payments was driven by both our Comdata and Cambridge businesses, which continue to produce very good results. Our toll business was up 20% organically due primarily to a number of growth initiatives implemented throughout 2017 and 2018 at STP.
Our lodging business was up 27%, driven primarily by an increase in room nights and continued FEMA rooms due to the impact from hurricanes. The FEMA impact contributed about 4% of the growth. Finally, our gift business was down approximately 19% organically in the quarter, due primarily to the timing of card orders. In the second quarter of 2017, we received a number of card orders which we expect to receive in the third quarter of 2018. In summary, another very good quarter for our non-fuel businesses. I would remind you that our organic revenue growth has been calculated assuming that ASC 606 was implemented in January of 2017 in order to calculate organic growth using a consistent revenue standard in both periods. Moving down the income statement.
Total operating expenses for the second quarter were $320.2 million compared to $325.2 million in the second quarter of 2017. Included in the second quarter of 2018 was the impact of ASC 606, which netted approximately $23 million of merchant commission and certain processing expenses against revenue. Excluding this impact, operating expenses would have been up approximately 5.6%. The increase was primarily due to acquisitions completed in the second half of 2017. Additionally, we incurred $1.7 million of expenses in conjunction with the previously announced unauthorized access. As a percentage of total revenues, operating expenses were approximately 54.7% compared to 60.1% in the second quarter of 2017. Again, excluding ASC 606, operating expenses as a percentage of total revenue would have been 56.6% in the second quarter of 2018.
Credit losses were $14.5 million for the second quarter or six basis points, compared to $14.7 million or nine basis points in the second quarter of 2017. Depreciation and amortization expense increased 6% to $68.6 million in the second quarter of 2018 from $64.7 million in the second quarter of 2017. The increase was primarily due to acquisitions completed in 2017. Interest expense increased 39% to $33.2 million compared to $23.9 million in the second quarter of 2017. The increase in interest expense was due primarily to the impact of increases in LIBOR and additional borrowing for the Cambridge acquisition and share buybacks. Our effective tax rate for the second quarter of 2018 was 23.5%, compared to 31.2% for the second quarter of 2017. The reduction in the tax rate was primarily due to the effect of US tax reform, which went into effect on January 1st, 2018.
As a result of US tax reform, the federal statutory income tax rate was reduced from 35% to 21%. The reduction in our effective tax rate due to the change in the federal statutory rate was partially offset by higher U.S. federal taxes related to the new GILTI tax and higher state income taxes, both resulting from US tax reform. Turning to the balance sheet. We ended the quarter with $1,185 million in total cash. Approximately $266 million is restricted and consists primarily of customer deposits. As of June 30th, 2018, we had $3,778 million outstanding on our term loans and revolver, and approximately $444 million of undrawn availability. We also had $939 million borrowed in our securitization facility at the end of the quarter. We purchased approximately 1,450,000 shares of common stock in the second quarter for approximately $292 million.
The board has authorized an additional $500 million increase in the share buyback authorization. We now have $629 million in total capacity. As of June 30th, 2017, our leverage ratio was 2.34 times EBITDA, which is well below our covenant level of four times EBITDA as calculated under our credit agreement. We intend to use our future excess cash flow to temporarily pay down the balance on our revolving credit facility and securitization facility and maintain liquidity for acquisitions and other corporate purposes. We are not a capital-intensive business, spending approximately $19.4 million on CapEx during the second quarter of 2018. On to the update for the outlook for 2018. We are raising our 2018 guidance to reflect our strong second quarter results compared to our prior outlook, even with the unfavorable macro that we now expect for the remainder of the year.
We believe that negative movements in foreign exchange rates, mostly in Brazil during the latter part of the second quarter, will more than offset the impact of favorable fuel prices, producing an overall unfavorable impact on second half revenue of approximately $30 million-$40 million, which is reflected in our updated full year revenue guidance. The good news is we believe we can offset the unfavorable macro through continued over-performance in some businesses, expected lower expenses, and the impact from a lower share count in the second half. Please refer to our second quarter earnings call supplement for additional information regarding our guidance. With that out of the way, our guidance is as follows. Total revenues, including the adoption of ASC 606, to be between $2,365 million and $2,415 million. Net income to be between $720 million and $740 million. Net income per diluted share to be between $7.75 and $7.95.
Revenue excluding the impact of ASC 606 to be between $2,470 million and $2,520 million. Adjusted net income to be between $960 million and $980 million. Adjusted net income per diluted share to be between $10.32 and $10.52. Some of the assumptions we have made in preparing the guidance include the following: Weighted average fuel prices equal to $2.88 per gallon average in the U.S. for those businesses sensitive to the movement in the retail price of fuel for the balance of the year. Market spreads equal to the 2017 average. Foreign exchange rates equal to the seven-day average as of July 1st, 2018. Interest expense of $135 million. Fully diluted shares outstanding of approximately 93 million shares. A tax rate of 22%-24%. No impact related to acquisitions or material new partnership agreements not already disclosed.
In terms of guidance for the third and fourth quarters, I want to remind everyone that the company's revenue and profits normally build sequentially throughout the year, resulting in higher revenue and profit in the third and fourth quarters. For the third quarter, we are expecting adjusted net income per diluted share to be in the range of $2.60-$2.70. Finally, I want to give you an update on the unauthorized access reported last quarter that primarily involved the company's Stored Value Solutions business. As a reminder, the company took prompt action to investigate and terminate the unauthorized activity. The company, through counsel, promptly engaged external experts in information technology forensics to assist in the investigation and the remediation and further enhancement of our systems to prevent future unauthorized access. The company also contacted federal law enforcement and merchants known to be affected.
The investigation has now been concluded, and we can report that based on the findings of the investigation, we believe the unauthorized access was limited to what was reported earlier. We do not expect the unauthorized access to have a material impact on the company's results of operations. With that said, operator, we will open it up for questions.
Thank you. At this time, we will be conducting the question and answer session. We ask that you please limit yourself to one question and one follow-up, and then re-queue for any additional questions. If you would like to ask your question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Bob Napoli with William Blair. Please proceed with your question.
Thank you. Good afternoon. Good job on the quarter. The guidance adjustments, where did you outperform fundamentally versus your expectations to enable you to adjust the guidance despite the negative macro?
Hey, Bob. This is Eric. Effectively, it's a number of things that's driving the second half revenue guidance. Obviously you heard us talk a little bit about the macro. Obviously, it's mostly FX rates in Brazil, which are causing the macro headwinds, so about $30 million-$40 million of unfavorable macro. Partially offsetting that is some overperformance, continued overperformance in a couple of our businesses. More specifically, like our corporate payments and our toll businesses. Some of the businesses that have performed well through the first half, we're going to expect to see those businesses to continue to perform well in the second half. In addition to that, we're going to help offset the impact of that by, we have lower expenses. If you recall, because our revenue is being impacted by unfavorable FX rates, our expenses are favorably impact by unfavorable FX rates.
Effectively, that's driving our expenses lower in the second half. Again, some about half of the unfavorability in revenue from FX, we're going to claw back in expenses in the second half. A little bit lower expense spending in some other areas as well. Finally, we'll have a lower share count in the second half because of the share buyback.
Hey, Bob, it's Ron. Let me just add, it's about $0.15. We're absorbing about $0.15 of macro in the next two quarters.
Okay. Thank you. Just a follow-up question. As we look forward to 2019 and longer term, what are your thoughts around the organic growth by, I guess, fuel versus non-fuel? If you wanted to break it down further by segment, just thoughts on the organic revenue growth. If non-fuel was growing faster, would that make it difficult to expand margins, I guess?
I think if you look at the last two years, Bob, we've been kind of high single digits in fuel and obviously better in the non-fuel. My comments earlier, I said we expect to moderate, call it into the mid-teens in the three non-fuel lines. We haven't started our 2019 plans yet, but I would assume some mix like that going forward. I think the upsides could be these new add-on ideas that we have. If those get traction, and material traction sooner, we could get more lift. Second, I think if we come up with some solution again to this SVS business, that would be another upside. Pre-budget, I'd say high single digits for fuel, teens for the other three, maybe some acceleration from the new programs, and then SVS is a wild card.
Great. Thank you. Appreciate it.
Thank you. The next question is coming from the line of David Togut with Evercore ISI. Please proceed with your question.
Thanks. Good afternoon.
Hey, David.
Pretty major announcement, Ron. Calling out a significant expansion plan for Europe and then Asia. Europe, you've got the beachhead with Shell. I'm wondering, as you look at continental Europe and Asia, what are the major growth opportunities, both organically and then through M&A?
Yeah, David, we're kind of on the same drill of trying to get positions either via partners or acquisitions versus a greenfield build. I'd say the difference in messaging is we've put not only more energy in the last six to nine months in Asia, but we're seeing better feedback. I'm trying to just put in people's minds that we haven't forgotten that part of the world, and that something may break our way on that side. That's I'd say the difference is the Asia activity looks, I think, a bit more favorable than it did six or nine months ago.
Is that mostly through M&A opportunity or organic growth?
It's not organic. It'd either be a partner deal or an M&A deal.
Got it. Visa seems to be making a bigger push in corporate payments with the announcement with WEX, and I think historically WEX had been principally Mastercard virtual payments as you had been. I'm just curious, does it make sense for you to bring in Visa just from a negotiating standpoint as you work with both of the networks in virtual payments?
Yeah, actually, a good friend of mine is the CFO of Visa, it's a relationship that we have. I would say that we're pretty happy with the Mastercard people, with the relationship with the deal. I'd say never say never. We're obviously in conversations with them, but on the same end, pretty happy with Mastercard. I think last I looked, we're about half of all of Mastercard's U.S. virtual card business. I think we're the second largest Mastercard issuer of commercial cards across every product line. I think they like us because we're relatively important to them on the commercial side.
Got it. Quick final question. On the Mastercard topic, when do you fully lap the Mastercard card conversion from a year ago? Is there a point where it could even become a tailwind as you exit the year?
Yeah. Hey, it's Ron again. I'm actually looking at that slide. I'd say that it is still, it was a negative in Q2 that we reported, it'll be a negative in Q3, and I'm looking at a page that said it'll turn positive in Q4. Part of the reason that we're outlooking, call it +8% organic in fuel in Q4, is that that boat anchor is finally making the turn from the minus to the plus column.
Understood. Thank you very much.
Good to talk to you.
Thank you. The next question is coming from the line of Tien-Tsin Huang with J.P. Morgan. Please proceed with your question.
Hello, guys. Good afternoon. Some good non-fuel performance, obviously. On the toll front, how much of the business is tied to volume versus subscription? I see that toll transactions were down again, but revenues 20%+ again. Just trying to better model that because we've been getting that question a lot.
Yeah, Tien-Tsin, it's Ron. Again, the majority, not all, but the majority of the model there is tag-based. You pay a fixed amount for a tag for a month. What I called out is that our active tags that we bill for grew 5% in Q2 versus the prior Q2. That's our best metric for volume. With that said, we do now get, call it 20% of the revenue base is sensitive to transaction. To your point, transactions, I think at the print, were down a bit. The strike, I think I mentioned, had about a 5% negative impact in transaction count. We think trans would have grown, call it a couple, 2%-3%, in addition to the tag growth, which is really more selling.
We obviously have picked up incremental revenue from parking and fuel, which obviously is not toll transactions and stuff. I'd say call it half, to pick a number, out of 20, that call it 5 is tags, a couple is tran, and we get some revenue for that, and then the increment would be incremental fuel spend and incremental parking revenues. The other balance is basically the program we put in place to get paid a bit more money from the high usage, particularly the trucking clients that use the product 80 times a month and put a lot of spend on the program.
Yeah. Okay. Thanks for that. It's pretty durable given that mix that you're describing. How about just to bring it up higher level into Brazil, has your outlook changed FX aside? I know that's a hard thing to say in Brazil, but FX aside, with what's going on with the election and the macro situation, has your outlook there changed? What's your appetite to do more there organically or inorganically?
Yeah, it's a good question. I guess, it's still difficult. I don't have it in front of me, but I think the economy is still zero to plus one or plus one for the full year. I think things are a bit frozen, right, with the election in the fall. I'd say we're still long on it. I've said it a million times that when you step way back, it's a big and early days payments market for everything that we do. One of our kind of comps is Edenred. Half their profits are in that market, and not half of ours are. I'd say that we still like it a lot because of the potential tension, and like others, hope we can get to the other side of this instability.
Okay. That's great. One last one. Sorry to pick up a third question here. The SMB room volume you said was up over 30, the digital booking tool, which you mentioned last quarter was going to work. Is that just the beginning? Could that actually improve from here? I'm just curious how sustainable that benefit will be.
Yeah, I think this is another great question. The fascinating part is we've trained those 10,000 small companies for years now how to use the product, which is to call themselves or walk in. Even that group that's been around a long time, one-third of them use the booking tool. Of the brand-new accounts, for example, that signed up in Q1, 70% of all the SMB rooms were booked with a tool. The new people that hear it from the get-go use it more. The first thing is the mix alone will increase it sequentially. Then second, I think as we keep marketing it to the quote, the old customer base, we'll get more lifts. My guess is you roll out a year, you'll be at 50% or 60% of all SMB will be booked with that tool.
All right. No, that's great. Thanks for the update.
Good to talk to you.
Thank you. The next question is coming from the line of Oscar Turner with SunTrust Robinson Humphrey. Please proceed with your question.
Hey, good evening, guys.
Hey, Oscar.
My first question is on Beyond Fuel. When do you think that initiative can be incremental to the segment's revenue growth? Can you give any color on adoption, like what % of fuel card customers are eligible to use it, and how many of them have used it to date?
Yeah, Oscar, it's Ron. I say I wish I could. I'd say that, again, it's still very early days. If you think about it, we've got Right? 45% of our company is fuel cards, and call it 10 businesses right around the world. We're introducing different flavors, different versions of this Beyond Fuel in different places. We have different things happening here in our U.S. local business than we have in our U.S. trucking business than we have in our U.K. business. The first headline is the approaches for Beyond Fuel are a bit different depending on the specific line of business. I'd say what the good news is, which I was trying to call out, is the early reactions are encouraging. Customers are taking up this AP companion card. We've got three or four teams still selling the BuilderPro construction card.
The problem is we're not long enough into the thing to turn it into a certain model yet. I'd say as we get closer to the end of the year and we build our 2019 plans, ask me again, and we should have a clearer thing. That would be, back to Bob's question earlier, I think that's the delta for people that want to bet. That's the vector for us of the pace of that could drive another point or two or three of faster growth if that stuff can materialize faster.
Okay, thanks for that color. Second is just on the long-term profit margin outlook. You guys have outlined a number of growth initiatives that you're executing on, some of which require building out sales force or acceptance networks. How should we think about the ability to maintain your current profit margin levels even as you reinvest towards these growth initiatives?
Yeah, we like our chances of those inching up. I think you know us well enough. We're not in the charity press release business. We're in the profitable growth business. We try to obviously onboard business that we can make money. I'd say the things that would cause us to have higher margins are, A, just the operating leverage. We still have 30%-40% of the company's cost structure is relatively fixed, so we have that going for us. B, these add-on things that you brought up earlier carry better margins because many of them are sold back to the same clients. Obviously the selling costs and servicing costs of an add-on is by its nature lower, and thus the add-on margins are higher. I'd say those two things bode well for higher margins.
I think just pace of growth and investment goes the other way, right? If we decide to step up sales investment or even more IT or innovation investment. I'd say if you net those two, our forecast over the next few years would be to keep ticking it up positive a bit.
Okay. Thank you.
Thank you. As a reminder, ladies and gentlemen, we ask that you do please limit yourself to one question and one follow-up question, and then re-queue for any additional questions. Our next question is coming from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.
Thanks. Pretty solid growth in the fuel card business from 1% to 5%, and you're talking about 8% growth for the fourth quarter. Obviously the headwinds are coming off, but can you also talk about the sales traction that you've seen here as you've revamped the sales effort on the fuel card specifically? Then also in the same light, if you can talk about the Casey's win, how should we think about it? What really drove that win? Thanks.
Yeah, Ashish, on the first part of the question, I'd say our confidence in the acceleration is mostly what you said, which is, okay, the print for this quarter was 5%, and we're outlooking 8%. I think David, a bit ago, asked me about GFN, and I said it was a negative impact in Q2, and our plans are for that to turn the other way. A lot of the acceleration from 5% to 8% is literally just moving that boat anchor aside. With that said, I hope you didn't miss that we sold more fuel card business globally this past quarter than ever in the history of the company, a record level of it. Assuming our retention or attrition stays kind of where it is, retention of 90%, obviously the adding of incremental fuel sales will help lift that thing above 8%.
To us, it's get the boat anchor aside so the growth is clean. B, pick up the sales volume, which we did again in the quarter. Third, Oscar's comment about the Beyond Fuel, get the Beyond Fuel to take. Those are the three plans, if you will, to get the thing back to an attractive number. On Casey's, your part 2 question, I think you asked timing or size or both?
Both, what drove that win? What were the criteria that Casey's was looking for in your product that drove that win for you?
I got you. First on the why us, I think all of these partner private label things have a similar screen. They have a, "Hey, can you do it? Can you operate the thing?" I think there's a few of us that have the systems and the people to actually be able to do it and not goof it up. They would look at SLAs of our other partners, reference us that we can do the work. Two is volume or growth. Do they believe that we can sell? Do we have selling systems that can work? Three is obviously the price. I'd say those are the three main criteria. I think us versus others that bid probably check the box on the first one. Obviously, other people in this space, WEX or Citibank, can do cards.
I think that the view of our ability to grow the volume and whatever our price proposal was, would be the two things that caused them to pick us. In terms of timing, we're looking at that conversion starting in Q4, and running into the beginning of next year. Although we don't give individual client revenues, I tell you, it's a $ single-digit millions annualized contract.
Thank you very much. Thanks for the color.
Thank you. The next question is coming from the line of Sanjay Sakhrani with KBW. Please proceed with your question.
Thanks. Question on the M&A and new partnership front, and whether or not you guys are getting closer to anything on those fronts.
Yeah, it's Ron again. On the M&A front, I think I mentioned the last call, we actually were on the five-yard line with something that we decided a no on. Something that was close, we kind of kicked out. I'm looking at the list in front of me. I'd say that we've got three or four deals that are active. What I use the term, they're in the works now. Looking at them, they call them $2 million-$400 million-ish in size, and then there's one larger deal. I'd say that nothing we're going to announce in the next 30 days, but things that we're mid and getting later on right now. On the partner front, probably the same. I got that page in front of me. We've got a couple things here in the U.S. We've got something in Europe.
We've even got something in Brazil. Again, I've been wrong so many times forecasting the timing of those. I'd say it appears again that we've got three or four partners that have an interest in maybe doing something, but it's not late enough for me to give you guys a steer that it'll be this year.
Got it. Just to follow up on, Ron, your response to Tien-Tsin's question on STP, when we look at how much of the Brazilian market has your tags, I guess Brazilian vehicles have your tag, what's the penetration rate of those tags into that market and sort of what's the growth opportunity there?
There's 2 ways to look at it. We look at the thing in terms of total toll spend. What's the total take from every toll booth in Brazil annually in Real? How much do we process or collect? I think I don't have that number in front of me, but I think it's around 60% of all the toll money that's collected in a year is collected by us. I'd say that we're moving down the curve. We sell about 1 million new tags per year. Again, we've got about 5 million active holders here in Q2. We sell about 1 million new ones per year. I'd say that we're moving down the curve of lighter users. Obviously, anyone on the toll on the highways that are going 100 times a month already have our tag.
We're more likely to get someone that's going five times or three times next. I'd say the big idea, which I don't know if I've communicated it well or not, but the big idea there is to take that technology and the relationships we have with fueling and parking and go to the other 35 million vehicles that don't go on the highway, that just go around the cities and park in the garages and go to Shell stations and Petrobras stations. When we look at that and the early returns on it are people like not stopping and paying for parking when they go to a mall there, and yet the companies only offer that service so far to people that are toll guys that go on the highway.
When we bought the company, our idea was, we're not going to be a toll company. We're going to be a toll technology or payment company. The message you guys ought to cue on is how fast can we start to add users that are not toll users that want to use fuel and parking in particular. I'm telling you, if that works, it's 5 to 10 times the market potential of the thing that they built. Again, we built a massive distribution system, almost 2,000 people in the field selling. We've turned on their digital. We've got third-party retail now. We, FleetCor, have relationships with the three biggest gas station fueling retailers in the country. We bring a fair amount to chasing this thing down.
All right.
That's the growth.
That makes sense. Thank you.
Thank you. The next question is coming from the line of Darrin Peller of Wolfe Research. Please proceed with your question.
Thanks, guys. Just first on the second quarter, if you can break down again the 5% fuel growth have been excluding the GFN issue and Chevron in the quarter. Just to be clear, wasn't there some element of pent-up demand flowing through now or shouldn't there be from the Mastercard product being kind of held off during this process that I would think would show up in swing in Q3? Just you were saying now the growth rate would re-accelerate up to 8% plus, or I guess, should we expect 8% plus in third quarter? Thanks, guys.
Yeah. Hey, Darrin. Yeah, if we exclude the impact of the GFN conversion issue and Chevron, the fuel card growth category would have grown around 8% organically. Again, it's in line with the guidance that we previously gave last quarter, that growth rates are going to start accelerating in the space. Again, we're going to clear the GFN issue, particularly as we get to Q4, and we'll have a cleaner kind of 8% or so growth rate in that quarter as we exit the year.
Okay.
Yeah, Darrin, hey, it's Ron on the part two question of, hey, you got a bunch of, you close a retail store, you've got a bunch of hot bread lines of people at the door coming in. I'd say again that toe stubbing we did with GFN not only impacted the customers that were on GFN, but hurt the productivity big time of our sales force. We turned them into service reps for, oh, my God, I don't know, four or five months. Yeah, four to six months trying to help clients they had sold, but the thing was broken and stuff. It's been a way longer recovery of getting that group of people back, A. Then B, because we thought the GFN platform was going to be the platform, a number of the new products we had built only ran on that platform.
I made the decision not to go forward with that and put-
Right
those new products on that platform, but to put them back on the old platform we had. That took us another three or four months to kind of re-engineer that. I didn't have salespeople selling new things that they didn't have confidence in. It's not really a pent-up demand. I really view it as a recovery that finally, we opened a brand new telesales center in Phoenix this past quarter, mostly to get away from that pain that the people, the couple of 100 people here lived through. I wanted a clean, brand spanking new group of people that hadn't been through it. I'd say that the way you should think about it is every quarter from now, we need to be building sales volume for that Mastercard product and getting farther away from that problem a year ago.
All right. Thanks. Just a quick follow-up, and then I'll leave it at that. Corporate payment's still an area that we're obviously excited about. The sales pipeline continues to be so strong there. I know you have tougher comps on pricing, but I guess I'm just wondering why that business wouldn't go back to even 20%, even if it takes a quick breather in the mid-teens. Am I thinking about this fairly?
Yeah, I think you are, and I think we've been with you since we started talking about this, that we're huge fans of that category because of the size of it. I think the biggest issue for us, Darrin, was the structure of the thing. When we bought that business initially, whatever size it was, it had two pretty big parts of its revenue. It had healthcare, which was, I don't know, a third to 40% of the business when we bought it, and it had a fair amount of partners and resellers in it, call it another quarter, a third. 50% or more of the business was that. Those two segments keep going the wrong way, even three years later. The healthcare business continues to decline even in Q2. It sits inside of that 20% plus. Still, healthcare was minus, although it's smaller.
Second, we keep getting repriced on renewals of the big reseller partners. Even though the volume goes up, we get less money. What I'd say to you is the non-healthcare and non-partner business is probably growing 35%, just to pick a number. What I'd say is we're obviously the guy running it, me, we're taking the business away from these two things that I'm saying that were not my favorites to verticals that we like construction, media, and just general AP. Once we kind of ring through the other side of this, the non-healthcare and non-reseller piece will be smaller parts, and you'll see, to your point, a 20% plus business going forward. How long it's going to take us to get that thing completely ironed out, it'll be sometime in the next year, would be my guess.
It's effectively remaking that business in flight is what we're doing.
Makes sense. Thanks, Ron.
Thank you. The next question is coming from the line of James Schneider with Goldman Sachs. Please proceed with your question.
Good afternoon. Thanks for taking my question. I was wondering if you maybe kind of address the same-store sales trends you've seen. I think you talked about up two in the quarter. Can you maybe talk about where you think that's kind of going up, down, or sideways as we go forward, and maybe any puts and takes in terms of industries within that?
Yeah, Jim, it's Ron again. I'd say, like we always say, we're not super smart in terms of the forecasting of same-store and GDP and stuff, we have seen, certainly in the U.S. now, at least three or four quarters in a row that have been in the plus column. In this Q2 that just finished, we had super help in lodging, in corporate pay space, and in Russia. Those three were way up in terms of growth of the existing customer base. Again, in our plans and the guidance we gave you, we're thinking that things kind of where it's been, kind of 1%-2%, I think is what Eric and I modeled for the rest of the year. Again, it's not a metric that's really super easy to forecast.
Completely understand, but it's helpful color. Thanks. Maybe as a follow-up, can you maybe just talk about kind of with Cambridge and almost a year in the rear view mirror here, your overall approach to the accounts payable market, how satisfied you've been with that acquisition so far, going forward from an M&A perspective, whether you think you might want to actually add more assets to bolster that AP portfolio, either in terms of the size of business or anything else?
That's a really good question. I know lots of people, maybe even on this call, for some reason, don't love the international payments FX business. Maybe there's some players out there that haven't done as well. We're delighted. I told the CEO earlier this week, coming up on a year, that we are so happy we bought his company, their company. It got off to a bit of a slow start because I had them working on really too many things, but they got through that. They've grown mid-teens plus. The last couple of quarters are outlooking good growth. The sales are way up. I don't know, 25%, 30% up over the prior year. I'd say at the highest level, we are really happy that we're in the space.
Number 2, we're starting to see some synergies from the cross-selling to the tune of $4 million or $5 million of new sales we're expecting as we exit this year from our Comdata people selling the Cambridge international pay people. That makes us feel good about the relatedness of the businesses. That the Cambridge clients obviously pay domestic AP too along with international AP, we like the fact that we're in both of those. Last thing I'd say to you is this whole AP, automating and digitizing AP, we think, I think, it is a massive opportunity. I worked at ADP for almost 10 years, half the expense structure on the planet is people, and the other half is vendors.
Building the, quote, "ADP of AP" is a theme we have in the company that we probably will take bigger positions in this space over the coming years. We like it a lot.
Super helpful. Thank you, Ron.
Thank you. Our next question is coming from the line of Peter Christiansen with Citibank. Please proceed with your question.
Oh, thank you. Thanks for fitting me in. Just two quick ones. First, your competitor this morning was shifting, well, at least playing with our guidance a little bit as it relates to the Chevron transition. Looks like timing might be pushed off a little bit there. Can you just remind us how you're factoring that into the outlook?
Yeah. Hey, Pete, this is Eric. Yeah, we're now thinking we'll probably have that portfolio for the remainder of 2018. We've kind of built that in. We originally were forecasting to have it kind of mostly through the third quarter. We'll probably now have it mostly through the fourth quarter. We'll transition away from it as we get in the next year.
That's helpful. The lodging business is doing fantastic. Just any commentary on, we're seeing more and more articles on this, on the trucker shortage here in the U.S. It seems to not be impacting the lodging business at all. Any general comments on if you're seeing any improvements there, either on the fuel card side or on the lodging side?
Well, on the lodging side, clearly, we're seeing increases in volume all over the portfolio. As we've said early on, we're focusing more down market, where there are smaller fleets, an area where that business has traditionally not sold in. We've been extremely successful, and it's an area that's very under-penetrated in this space. We've seen a lot of success, and we think we're going to continue to see a lot of success. Now adding the digital tool, booking tool, has added even more incremental rooms to the business as truckers are starting to use that tool a lot to book their new reservations. It's business that we're gaining that we used to kind of lose a little bit of in the past. We're very bullish on the continued success of that business going forward.
Great. Thank you for fitting me in.
Thank you. Our next question is coming from the line of Matthew O'Neill with Autonomous Research. Please proceed with your question.
Yeah. Hi. Thanks, guys. Ron, I was hoping I could follow up on a comment you made in your prepared remarks around sales channels and working with new partners like merchant acquirers. I was just curious kind of what the opportunity is there, who and how are you working together, and any other details you could provide on that. Thanks.
Yeah, that's a really good question. I'm friends with Jeff Sloan of Global and Frank, so I know both of those guys and their businesses. I think the new news for us is, call it over the last five or 10 years, those companies have signed up way more kind of service businesses. Think of a plumbing or a construction person going out to a house and getting paid with a card now instead of billing. They're not super important accounts to an acquirer because their volumes are relatively low. They could be super important accounts to us because they buy more fuel than they run credit card transactions. I'd say the opportunity that we're exploring is kind of leveraging their channel and their existing client base that's in the service-centric kinds of businesses to take some of our card products.
Our products fit some of their customers. Both of those companies are quite used to partner work and kind of working, obviously, for example, with banks, and ISOs and buyers and stuff. I think it's right in their wheelhouse to maybe work with someone like us. That's the idea, is to use their relationships and customers and channels and maybe put some of our product line in.
Got it. Thank you very much. Would they think about working the relationship in the opposite direction as well, potentially? Or is that premature?
They would. They both are smart guys, and they had some reciprocal ideas of some ways that we could help them. On that point, just this idea we talked, I guess Peter said in the last call about winning, and people talk a lot about nameplates and stuff. Just to remind people, we sold 30,000 new business accounts in Q2. 30,000 new businesses joined our portfolio. For us, this word winning is not a name of a company. It'd be a long list for us to name who we're winning, but I want to make sure people leave the call that in our view, that's winning. Selling more new business than you ever have and selling diversified business that you can make a buck on is our idea. Just an FYI.
Great. Thank you very much.
Thank you. Operator, please, we have no additional questions at this time. This does conclude today's teleconference. Ladies and gentlemen, we thank you for your participation, and you may disconnect your lines at this time.